Friday, January 28, 2011

The concept of a welfare pedestal has been popularized by Noel Pearson. As a lawyer and passionate advocate for the interests of aboriginal people who live on the Cape York Peninsula of North Queensland, some readers might expect that he would spend his time arguing for more government hand-outs to remedy social problems in aboriginal communities. However, Pearson recognizes that the welfare programs are actually a major cause of the social problems in those communities and his main focus is on finding ways to stop hand-outs from harming his clients. He is not against government help for his clients, he just wants to ensure that it does them more good than harm.

The insight behind the welfare pedestal is that welfare payments can provide perverse incentives by encouraging some people to remain on welfare rather than to seek paid employment. Over the last decade or so, concern about an emerging problem of inter-generational welfare dependency (in non-indigenous communities as well as indigenous communities) has led to some tightening up in the provisions attached to unemployment benefits. It is too soon to claim that the problems associated with unemployment benefits and pretend work schemes have all been resolved, but the problems are now widely recognized and some appropriate remedial action is being taken.

The example of a government program contributing to the welfare pedestal that Pearson gives in his recent lecture, ‘Pathways to Prosperity for Indigenous People’, is family benefits. He suggests: ‘Life on the welfare pedestal in a country that distributes money through a generous family tax benefit system is quite a rational choice’ (The Sir Ronald Trotter Lecture, New Zealand Business Roundtable, 2010).

I had not previously thought of the family tax benefit in that way. I have tended to view the family tax benefit as a kind of negative income tax, providing net benefits for families with low and modest incomes. I was previously aware of adverse incentives resulting from fairly high effective marginal tax rates for people on fairly modest family incomes above the point where the means test begins to cut in (about $45,000). According to the way economists usually look at these things, however, a family with four children obtaining $19,600 per annum from family benefits has no disincentive to obtaining additional income from work of more than $25,000.

In another paper Pearson acknowledges that the absence of punitive marginal tax rates is probably not an important consideration when people in Cape York Peninsula make their decisions about how many hours of the week they allocate to work or leisure. He writes:

‘Indigenous parents are having large families at an earlier age. Their welfare payments add up to a significant yearly wage. This income is received without them ever having to make any active decisions about education or work. When they have started receiving family payments, they face this choice: have an income which they are prepared to exist on for minimal work obligations or work longer hours for a limited increase in income and significantly less leisure time.

The behaviour of people in our communities indicates that many of our people do not intend to increase their income by increasing their labour supply. In some remote communities, it has been difficult to find applicants for the real jobs that do exist, despite the fact that the vast majority of people are unemployed’.

Pearson argues that ‘conditions and incentives to make active and beneficial life choices should apply to family payments’ even though he acknowledges that problems arise because such payments ‘are not indigenous-specific schemes’.

That poses a question: If people make the choice to live on generally available family benefits rather than to earn higher incomes, why should we view this as a problem? I see no problem in individuals choosing to live on low incomes. We should respect the choices that some individuals make to live a life of poverty (and of chastity too, if that is their choice). I can’t see why anyone should have a problem with individuals making whatever income/leisure choice that they desire.

I can see a problem, however, in governments providing family benefits to people who do not have adequate regard for the well-being of their children. I think we (taxpayers/voters) should insist that family assistance should only be provided to parents when they meet conditions such as ensuring that their children attend school regularly. Perhaps it would not be too difficult for a prime minister who has a special interest in educational opportunity to find a simple way for such a condition to be applied to family tax benefits across all sections of the community.

Tuesday, January 25, 2011

One of the benefits I have obtained from reading Nicholas Phillipson’s excellent book, ‘Adam Smith, an Enlightened Life’ is a better understanding of what Smith was trying to achieve in writing ‘The Theory of Moral Sentiments’ (TMS). He apparently saw the book as a contribution to a ‘science of man’ based on the observation of human nature and human history. As such, it provided a theory of sociability as well as a theory of ethics.

Phillipson suggests that TMS can be viewed as a response to earlier writings of other scholars. In the interests of brevity, an appropriate place to begin the story is with David Hume’s view that human personality had been refined by the civilizing process - that humans were happiest when they were active and were best able to live an active life in a commercial society. By contrast, Jean Jacques Rousseau claimed that humans were naturally indolent and had only been truly at one with themselves in the ‘savage state’, before they discovered commerce and developed a vain desire for superiority over one another. Smith agreed with Hume - the TMS provides his view of how humans learn morality from the experience of common life and how this can lead to the improvement of society.

Smith acknowledged that everyone wants to better their condition. At one point he even seems to imply that everyone places higher priority on improving their relative position in society than on achieving an easier and more pleasurable life (TMS: 50). (My grandmother, whose life became easier and more pleasurable in the 1950s after she obtained her first refrigerator and washing machine, might have thought that comment to suggest that Smith was not sufficiently aware that he lived a privileged life. But I digress!)

Smith also makes the point that individuals should be responsible for looking after their own interests: ‘Every man is, no doubt, by nature, first and principally recommended to his own care; and as he is fitter to take care of himself than of any other person, it is fit and right that it should be so’ (TMS: 82). (I think Smith makes a stronger case for individual freedom here than who make the dubious claim that each individual is always the best judge of his or her own interests. But I digress again!)

Impartial spectators condemn violations of fair play among individuals competing to better themselves:

‘In the race for wealth, and honours and preferments, he may run as hard as he can, and strain every nerve and every muscle, in order to outstrip all his competitors. But if he should justle, or throw down any of them, the indulgence of the spectators is at an end. It is a violation of fair play that they cannot admit of’ (TMS: 83).

Smith’s ethics is based on the simple proposition that when individuals reflect upon their own past actions from the viewpoint of an impartial spectator they feel remorse when they have acted unjustly. His response to critics who suggested that he was reducing the principles of ethics to popular culture was that while children might seek to be universally agreeable, mature people who have important interests to manage find that they cannot please everyone. While some people might be content to follow popular culture, those who are morally responsible and fitted for public life have to establish their own impartial spectators as a judges in their own minds (Phillipson, p164-165).

Irrespective of whether we find it useful to imagine an impartial spectator embodied within our selves, it is clear that humans do have the capacity to reflect on their own behaviour and to follow the dictates of conscience rather than always seeking immediate pleasure or following selfish interests. This is not always easy, however. As Jonathan Haidt points out, our efforts to become morally responsible may be hindered by our inner lawyers who seek to excuse us and blame others for our misdeeds. Haidt suggests that it is worthwhile acknowledging our faults to ourselves:

‘When you find a fault it will hurt, briefly, but if you keep going and acknowledge the fault, you are likely to be rewarded with a flash of pleasure that is mixed, oddly, with a hint of pride. It is the pleasure of taking responsibility for your own behaviour. It is the feeling of honor’ (‘The Happiness Hypothesis’, p79).

Identity economics, developed by George Akerlof and Rachel Kranton, may provide a useful framework to consider the process of character development that Adam Smith was discussing. Everyone obtains satisfaction from acting in accordance with their identity and is discomforted by acting contrary to it. A person who perceives himself or herself as the kind of person who respects the rights of others is likely to obtain satisfaction from acting in accordance with this ideal. This person may develop a reputation for trustworthiness and is likely to be trusted.

However, I don’t think it is particularly useful to try to think about development of identity and character outside the context of social interactions that reward particular behaviours and penalize others. It seems to me to be a fact of life that a person who identifies strongly as a member of a small community and has limited social interactions outside that community is less likely to feel conscience-stricken if he or she acts unjustly towards a stranger than towards another community member. The ethics of respect for the rights of strangers is no doubt encouraged to some extent by abstract ideals that would be endorsed by impartial spectators, but is likely to be more strongly encouraged by mutually beneficial commerce which offers ongoing rewards for ongoing cooperation between strangers.

Sunday, January 23, 2011

Perhaps I should confess at the outset that I cannot provide a definitive answer to this question. What I am about to present is some evidence suggesting that big government might weaken the social fabric. I think the evidence is sufficiently strong to suggest that the question should be considered seriously. (I provided similar evidence a couple of years ago – and I might have to write about it a few more times before many people take notice!)

The current post is one of a series in which I am looking at how values differ between high income countries with big governments and those with smaller governments. Previous posts have looked at child qualities that are encouraged, attitudes toward work and success and tolerance of neighbours who are different.

The indicators I am using to measure strength of the social fabric are estimates of the percentages of populations who say that the following activities are never justifiable: falsely claiming government benefits; cheating on taxes; and accepting a bribe. As in previous posts in the series I have focused on 14 high-income countries with broadly similar European cultural heritage for which data is available from the most recent World Values Survey.

In the table below these countries have been ranked by size of government, using government spending as a percentage of GDP as an indicator of size of government. (For each variable the five highest numbers are shown against a red background and the five lowest ratings are shown against a blue background.)

The data in this table provides evidence that people in high income countries with big governments tend to have more permissive attitudes toward a range of anti-social activities than those in countries with smaller governments. That doesn’t establish causation, but I think it should make researchers interested in trying to understand what is happening.

Why should we be concerned if big government does tend to make people more relaxed about welfare fraud, tax evasion and bribery? Can’t the problem be solved by just employing more public servants to prevent such anti-social activity? I don’t think so. Increased surveillance poses further problems including the added cost of service delivery and the increased intrusion of government officials into the private lives of citizens.

Saturday, January 22, 2011

I am not sure why I ever thought that people who live in welfare states would tend to be more tolerant than people in countries with smaller governments. It might have something to do with all the talk about social solidarity and social cohesion by those advocating collectivist policies. Rather than thinking about egality and fraternity I should have been thinking about liberty - and the historical links between respect for the rights of others and civility.

World Values Surveys ask a relevant question about the people respondents would not like to have as neighbours. People were asked to choose from a long list including drug addicts, heavy drinkers and people with criminal records. Reluctance to live next to people belonging to some of these groups may have more to do with safety concerns than with intolerance. Three groups that seem to me to provide a fairly neutral test of levels of tolerance in different countries are people who have aids, immigrants or foreign workers and homosexuals.

As in other recent posts on differences in values between people living in countries with relatively big and relatively small governments (here and here) I have focused on14 high-income countries with broadly similar European heritage for which data is available from the most recent World Values Survey (WVS 2005 – 2008). These countries have been ranked by size of government, using government spending as a percentage of GDP as an indicator of size of government (OECD Economic Outlook data on general government outlays as a percentage of nominal GDP, averaged over the three years 2005–08).

In the table below the five highest percentages for each variable are shown against a red background and the five lowest percentages are shown against a blue background.

Apart from Swedes, it seems that people who live in countries with big governments are relatively intolerant about who they want as neighbours. Social solidarity apparently does not include people who are perceived to be different.

Thursday, January 20, 2011

I have recently been thinking about differences in values held by people in high income countries with big governments and those with smaller governments. In my last post I looked at evidence from the World Values Survey of differences in qualities that people consider are important for children to learn. One of the differences noted was that people in countries with relatively small governments tend to place more emphasis on hard work as an important characteristic to encourage in children. In this post I look at more evidence relating to beliefs about hard work.

The survey question I am looking at requires respondents to assign a value from one to ten depending on whether their beliefs are closer to the proposition that ‘in the long run, hard work usually brings a better life’ (1) or ‘hard work doesn´t generally bring success - it´s more a matter of luck and connections’ (10). I have focused on the percentages who are most optimistic that hard work brings success, looking at population averages and averages for young people aged 15 - 29.

As in the last post I have focused on 14 high-income countries with broadly similar European cultural heritage for which data is available from the most recent World Values Survey. The results are presented in the table below, along with the data in my last post on the importance for children to learn the virtue of hard work. As in the last post, the five highest percentages for each variable are shown against a red background and the five lowest percentages are shown against a blue background.

As might be expected, there seems to be a reasonably close correspondence between emphasis on the importance for children to be encouraged to learn the virtue of hard work and the belief that hard work usually brings a better life. People in countries with small governments are more likely to hold those beliefs than those in countries with big governments.

What should we to make of this result? It could mean that incentives associated with big government tend to weaken the work ethic. It could mean that a weakening of the work ethic tends to promote big government. Or, as seems more likely to me, the results might reflect a complex interaction between cultural heritage and changes in beliefs, values, ideologies and economic incentives.

The results in the last column of the table are particularly interesting (and somewhat disturbing to me as an Australian). In most of the countries considered the proportion of young people who are optimistic that hard work brings success is somewhat lower than for the population as a whole. In the case of Australia, however, the difference is more substantial. Closer inspection of the data indicates that the proportion of young Australians who think that success is a matter of luck and connections is also lower than for the population as a whole. So, members of the younger generation are not particularly cynical about the rewards of hard work – they are just markedly less optimistic about this than older generations.

It would be premature to conclude that these results indicate that we are heading toward some kind of brave new world where few people bother to work hard because no-one believes strongly any more that hard work brings success. I need a better understanding of the implications of changes in beliefs about the relationship between hard work and success before reaching any conclusions. If anyone knows where I can find relevant research perhaps they could enlighten me.

Wednesday, January 19, 2011

If big government is taking us towards a brave new world we might expect this to show up in differences in values held by people in countries with big and small governments. As discussed in my last post there seems to be some evidence that people in high-income countries with big governments tend to hold more secular-rational values than those in high-income countries with small governments. In this post I explore this further by looking particularly at differences in the values that children are encouraged to learn at home.

World Values Surveys ask a directly relevant question about what qualities it is especially important for children to be encouraged to learn at home. Respondents are asked to choose from the following list: good manners, independence, hard work, feeling of responsibility, imagination, tolerance and respect for other people, thrift (saving money and things), determination/ perseverance, religious faith, unselfishness and obedience.

I have focused on the 14 high-income countries with protestant or catholic heritage for which data is available from the most recent World Values Survey (WVS 2005 – 2008). These countries have been ranked by size of government, using government spending as a percentage of GDP as an indicator of size of government (OECD Economic Outlook data on general government outlays as a percentage of nominal GDP, averaged over the three years 2005–08).

Child qualities which apparently differ in importance between the countries with big and relatively small governments were identified by looking at the differences between the averages for the four countries with largest and smallest size of government. The differences were greatest (relative to the mean) in the case of hard work, thrift, religious faith and unselfishness.

The results are shown in the following table in which countries are ranked by size of government. For each variable the five highest numbers are shown against a red background and the five lowest ratings are shown against a blue background.

The results suggest that hard work tends to be more strongly encouraged in the countries with relatively small governments, while thrift tends to be more strongly encouraged in countries with big governments. (I find that result surprising because hard work and thrift often tend to be linked together as traditional virtues.) The results for religious faith and unselfishness do not appear to be consistently related to size of government.

It will be interesting to see whether any consistent patterns emerge from an examination of other values that apparently differ according to size of government.

Monday, January 17, 2011

In my last post I discussed Aldous Huxley’s ‘Brave New World’ and ended up asking whether culture and public policies in pursuit of happiness are moving systematically in directions that dehumanize people. I suggested that the next step could be to consider what dehumanizing involves and hinted that it could have to do with taking away liberty i.e. individual responsibility for making choices and bearing the consequences actions. If you accept, as I do, that the nature of adult human beings is such that their flourishing must be a self-directed process (discussed in an early post on whether freedom is necessary for human flourishing) then I think you should also accept that restrictions on liberty are dehumanizing.

I must admit, however, that I would find it hard to argue that governments are dehumanizing me when they impose restrictions on my liberty to do things that I don’t want to do or compel me to do things that I would do in any case. Nevertheless, that kind of paternalism is not benign – it is disrespectful and encourages people to become dependent on government for guidance about how they should live their lives.

Rather than pursuing that line of reasoning, what I want to do in this post is to consider in general terms where cultural change is taking us. I think the best place to begin is with the work of Ronald Inglehart on changes in cultural values that have occurred with economic growth. (At this point readers who are familiar with Inglehart’s research may wonder how it is relevant to the topic of the post. Please be patient!)

Inglehart has documented that a substantial shift from survival values to self expression values has generally occurred in countries with rising per capita incomes. This has entailed, among other things, less deference for external authority, rising demands for participation in political decision making, more emphasis on gender equality, more tolerance of diversity and more emphasis on imagination and tolerance as values to teach a child and less emphasis on the virtue of hard work. This shift in cultural values has been followed through successive age cohorts over the period from 1970 to 2006, with the younger generation apparently continuing to establish values during their formative years that place greater emphasis on self expression (‘Changing values among western publics from 1970 to 2006’, 2008).

Inglehart (with Wayne Baker) has also examined shifts in another dimension of values – the change from traditional values to what he refers to as ‘secular-rational values’. Traditional values, which are most prevalent in pre-industrial societies, place a strong emphasis on religion and national pride, and have relatively low levels of tolerance for divorce, homosexuality and abortion. However, the relationship between economic growth and secularization is more complex than that between economic growth and self expression values. Secularization seems to apply mainly to the shift to an industrial society, which was completed some time ago in most advanced industrial countries. The authors suggest that the fact that the broad cultural and religious heritage of a society leaves an imprint on values that endures despite modernization (‘Modernization, cultural change and the persistence of traditional values’, 2000).

Researchers have used the two dimensions of cultural change outlined above to prepare the cultural map of the world shown below.

Source: Ronald Inglehart and Christian Welzel, Modernization, Cultural Change and Democracy. New York, Cambridge University Press, 2005: p. 64 based on the World Values Surveys, see www.worldvaluessurvey.org .

The point that strikes me in this chart – apart from the apparent importance of cultural and religious heritage in explaining values – is that the countries with relatively high secular-rational values in Protestant and Catholic Europe tend to be countries with big governments. I don’t know whether these countries have secular-rational values because they have big governments, whether they have big governments because they have secular-rational values, or whether cultural heritage explains both big governments and secular-rational values. It is possible that causation runs in all those directions and that ideological factors (e.g. the influence of Marxism in continental Europe) are also important.

What does it mean if people in high-income countries with big governments tend to have secular-rational values? Is this evidence of movement towards a brave new world? I don’t know, but it seems like a good idea to look more closely at the data from the world values surveys to see what it shows about differences in values of people in OECD countries with relatively big and relatively small governments.

Aldous Huxley’s ‘Brave New World’ (1932) is about the potential conflict between human happiness as a goal of society and traditional virtues such as nobility and heroism.

Mustapha Mond, a controller of the new world, explains to John Savage that there is no longer any need for civilized man to bear anything seriously unpleasant. As the discussion continues, Mond claims that civilization has absolutely no need of nobility or heroism:

‘In a properly organized society like ours, nobody has any opportunities for being noble or heroic. Conditions have got to be thoroughly unstable before the occasion can arise ... And if ever, by some unlucky chance, anything unpleasant should somehow happen, why, there's always soma to give you a holiday from the facts. And there's always soma to calm your anger, to reconcile you to your enemies, to make you patient and long-suffering. In the past you could only accomplish these things by making a great effort and after years of hard moral training. Now, you swallow two or three half-gramme tablets, and there you are’ (Chapter 17).

The discussion ends with Savage rejecting this new world in which happiness is paramount:

‘In fact,’ said Mustapha Mond, ‘you're claiming the right to be unhappy.’

‘All right then,’ said the Savage defiantly, ‘I'm claiming the right to be unhappy'.

'Not to mention the right to grow old and ugly and impotent; the right to have syphilis and cancer; the right to have too little to eat; the right to be lousy; the right to live in constant apprehension of what may happen to-morrow; the right to catch typhoid; the right to be tortured by unspeakable pains of every kind.’ There was a long silence.

‘I claim them all,’ said the Savage at last.

Mustapha Mond shrugged his shoulders. ‘You're welcome,’ he said.

Some of the rights that Savage claims do not seem to me to be an essential part of the rich tapestry of human life. What he must be saying is that he would prefer to live in our imperfect world rather than a de-humanizing world in which happiness is paramount.

Are we heading towards Huxley’s brave new world? If so, we clearly still have some way to go before we get there. There are still a lot of noble and heroic people around, as is particularly evident at times of natural disasters such as the current floods in Queensland. There doesn’t seem to be much risk of human reproduction and child rearing being taken over by government, even though much of the technology needed to do this already exists. Sexual promiscuity has increased, but there doesn’t seem to be much risk that social mores will develop in directions opposed to monogamous relationships. The risk of totalitarianism seems to have receded.

At the same time, however, while we may never have soma, there is already widespread use of pharmaceutical products to influence emotions. Entertainment involving virtual reality is popular and technology seems to be advancing rapidly in this area. Perhaps the ‘feelies’ will soon be coming to a theatre near you.

I see no grounds to object to individuals using new technologies in pursuit of their own happiness if that is their choice. The question is whether culture and public policies in pursuit of happiness are moving systematically in directions that dehumanize people.

That question seems to be a lot like the question I started with. I hope I am not going to become locked into some kind of Groundhog’s day where I keep asking the same question over and over. If I am going to make progress, the next step might be to consider what it means to dehumanize a person. Perhaps it has to do with taking away their responsibility for making choices and bearing the consequences their actions.

Wednesday, January 12, 2011

‘If respect for individual rights were to be shown to lead, not to order and prosperity, but to chaos, the destruction of civilization, and famine, few would uphold such alleged rights, and those who did would certainly be held the enemies of mankind. Those who can see order only when there is a conscious ordering mind - socialists, totalitarians, monarchical absolutists, and the like - fear just such consequences from individual rights. But if it can be shown that a multitude of individuals exercising a set of “compossible” rights ... [rights that can exercised at the same time without entailing conflicts] ... generates, not chaos, but order, cooperation, and the progressive advance of human well-being, then respect for the dignity and autonomy of the individual would be seen to be not only compatible with, but even a necessary precondition for, the achievement of social coordination, prosperity, and high civilization’ - Tom G Palmer, ‘The literature of liberty’.

I wish I had written that paragraph. It captures a lot about the relationship between freedom and flourishing that I have been writing about on this blog for the last couple of years. My personal conviction is that individual liberty is necessary to individual flourishing because individual flourishing is an inherently self-directed process. While I seek to persuade others to adopt that view, I recognize that the course of public policy depends much more strongly on public perceptions of the consequences of alternative courses of action.

Much of the discussion in my blog has been about the consequences of freedom or lack of it. I discussed the strong positive relationship between freedom and objective measures of well-being (income, longevity etc) in an early post. The general conclusion from my posts discussing measurement of subjective well-being is that claims sometimes made that the findings of happiness research conflict with these conclusions are simply wrong. Not only do people in countries with relatively high levels of freedom have higher material living standards, they also tend to have higher life satisfaction.

However, even though the existence of a positive general relationship between liberty and well-being now seems to be disputed less frequently, freedom is still under challenge from several different directions. First, there is a challenge to economic freedom associated with the global financial crisis (GFC). The GFC has raised important economic issues about the role of monetary and fiscal policy, the effects on the financial system of the failure of large financial institutions and the effects of different regulatory regimes on behaviour of large financial institutions. Economists will probably still be debating some of these issues in 50 years time, but at this stage it looks to me as though the extent of additional regulation likely to be seriously contemplated will be relatively minor and confined to the financial sector. Not many people are suggesting the nationalization of industry and the introduction of Soviet-style economic planning to prevent future financial crises.

The second challenge to freedom is associated with action to deal with alleged externalities, particularly global emissions of greenhouse gases. Some restriction of freedom is of course justified to discourage activities that impinge on the rights of others. Some of the ways the ‘problem’ of greenhouse gas emissions is being tackled in many countries, however, involve greater than necessary restrictions of economic freedom. This stems from rent-seeking activities of industries, including those favouring particular technologies. The challenge is serious, but probably easier to deal with than previous challenges that many countries have dealt with successfully, including, for example, overcoming opposition to reductions in barriers to international trade.

The third challenge to freedom seems to me to be more fundamental and more serious. It stems from the collectivist idea that governments are responsible for the happiness of citizens, rather than for protecting their rights - including their right to pursue happiness as they think fit. Many people have come to expect governments to act as guardians of their well-being, not only giving financial support in times of need, but also protecting them from making bad decisions. In relying on governments to perform such a role they infringe the liberty of other people who do not want or need such protection.

This challenge to individual liberty seems to come mainly from people who do not mean anyone any harm – people who live among us who want us all to have happier lives. As I write this I am conscious that at times I have actually supported government regulations to protect people from making bad decisions that might adversely affect their well-being. You might have similar memories. Sometimes we may have had reason to be concerned that if people were not compelled to act in what we perceived as ‘their interests’ they would end up imposing a burden on the welfare system or on private charity. That just underlines the point I am making - the greatest challenge to individual liberty comes from people who do not mean anyone any harm.

In modern democracies the choice between liberty and paternalism rests ultimately in the hands of our fellow citizens. The course of public dialogue about such matters turns most crucially on public perceptions of the consequences for human well-being of the policy choices that governments are making. While each public policy decision to restrict liberty and relieve individuals of responsibility for their own actions may seem relatively benign when considered in isolation, that doesn’t mean that the cumulative impact of many such decisions will be benign.

This raises the question I will consider in the next post:
Is collective pursuit of happiness taking us in directions that are relatively benign, or is it taking us to a ‘Brave New World’?

Sunday, January 9, 2011

While recently reading Deirdre McCloskey’s ‘Bourgeois Dignity’, Joel Mokyr’s ‘The Enlightened Economy’ and Eric Jones, ‘Locating the Industrial Revolution’ (discussed previously here, here and here) I was pleased to find that these authors have been able to make a strong case that the industrial revolution can be best explained by modern economic growth theory that emphasises the importance of technological progress, innovation and productivity improvement. It is reassuring that this conceptual framework fits the facts relating to the history of the last few hundred years as well as comparative growth experiences of different countries in more recent times.

In their explanations, however, McCloskey and Mokyr move substantially away from the view that because ‘incentives matter’ the best explanation for everything must be found in changes in economic incentives. This does not necessarily involve moving away from a utility maximization framework (although McCloskey does). There is no reason why a Max U framework cannot recognize that inventors may be strongly influenced by the pleasure of discovery and by recognition of their peers; innovators may obtain pleasure from seeing scientific knowledge being put to good use; and everyone may gain some satisfaction from acting in accordance with their own perceptions of their identity, whether that involves behaving like a scientist, a gentleman, a tycoon, a rent-seeker or a mendicant.

In explaining the industrial revolution Mokyr and McCloskey emphasize the importance of beliefs and ideologies – in particular those associated with the Enlightenment. Three inter-related strands of beliefs and ideologies connected to the Enlightenment seem to be particularly relevant:

First, Mokyr argues that the influence of the Baconian program - with its emphasis on research to solve practical problems - extended beyond formal scientific research. He makes a strong case that the ‘legitimization of systematic experiment carried over to the realm of technology’, including through the proliferation of provincial ‘philosophical’ societies discussing practical and technical issues.

Second, as emphasized by McCloskey, there was a bourgeois revaluation – a change in attitudes toward the middle classes, markets and innovation. Mokyr links this to norms relating to politeness and gentlemanly behaviour, and an apparent improvement in social trust which reduced transactions costs.

Third, there is the ideological change stemming directly from the success of the Scottish Enlightenment and, in particular, from publication of ‘Wealth of Nations’ by Adam Smith. As Mokyr writes: ‘The Enlightenment in its different manifestations advocated a set of new institutions that cleared up centuries of mercantilist policies, regulations and social controls, whose objective had been primarily to redistribute resources to politically connected groups and to enhance the interests of the Crown (the best connected group of all). The mercantilist world was unsuitable to a brave new world of continued technological progress driven by free markets, innovative entrepreneurship, and an internationally collaborative effort to advance technology’ (p. 486).

In reviewing Eric Jones book I asked myself whether the industrial revolution could be attributed to economic freedom and suggested that his book had reinforced my view that it could be (even though Jones does not argue strongly in favour of that view). My subsequent reading has not led me to change that view but it suggests that economists interested in economic growth should give more attention to beliefs and ideologies that lie behind the formal rules of the game and their incentive structures.

In writing this I am reminded of comments made by Douglass North in his Nobel Prize lecture in 1993:

‘It is the admixture of formal rules, informal norms, and enforcement characteristics that shapes economic performance. While the rules may be changed overnight, the informal norms usually change only gradually. Since it is the norms that provide "legitimacy" to a set of rules, revolutionary change is never as revolutionary as its supporters desire and performance will be different than anticipated. And economies that adopt the formal rules of another economy will have very different performance characteristics than the first economy because of different informal norms and enforcement. The implication is that transferring the formal political and economic rules of successful western market economies to Third World and eastern European economies is not a sufficient condition for good economic performance. Privatization is not a panacea for solving poor economic performance’.

The fact that privatization by itself is no panacea does not stop me from arguing in favour of it, but I take the point that economic freedom cannot be sustained unless prevailing beliefs, ideologies and norms are supportive.

Postscript:
I should have mentioned the growing importance of freedom of speech as a factor which would have contributed to the various strands of Enlightenment thinking noted above. This enabled the growth of social networks and civil society as discussed by Mokyr (p. 387). The line of argument in Timothy Ferris's book, 'The Science Liberty', (which I discussed here) is also relevant in this context.

Monday, January 3, 2011

Some readers may think this question is like asking whether the Pope is a Catholic. The question is worth considering, however, because it raises some fairly common misconceptions about the industrial revolution (some of which I held until recently).

My main reason for reading about the industrial revolution has to do with my interest in human flourishing. The industrial revolution led to a massive, unprecedented and ongoing improvement in living standards, beginning in Britain and then spreading to other parts of the world. From that perspective, the industrial revolution tends to be associated with the advent of sustained economic growth.

However, Joel Mokyr suggests that the best available estimates indicate that growth in per capita income in Britain did not accelerate until the decades after 1830 - well after the beginning of the industrial revolution (‘The Enlightened Economy’, p 256). That makes sense if we define the industrial revolution in terms of the technological innovations which brought about a transformation in the way goods and services were produced in the British economy between 1760 and 1830. One reason why these innovations were not immediately reflected in higher per capita income growth was the rapid growth of population – the English population increased from 6.1 million to 13.1 million between 1760 and 1830 (p.257). Another reason was the initial concentration of major innovations in a relatively small, though rapidly growing, part of the British economy (p. 82).

Information from a table presented by Deirdre McCloskey is graphed below in order to provide some perspective on the contribution of different industries to productivity growth in Britain over the period from 1780 to 1860 (‘Bourgeois Dignity’, p.219).

Figure 1 shows the relatively rapid growth of productivity in some manufacturing industries as well as canals and railways.

Figure 2 shows that despite the more modest productivity growth rate in agriculture, the relatively large size of this sector means that over the period considered its contribution to overall productivity growth was comparable to that of the manufacturing industries with more rapid productivity growth.

So, was the industrial revolution mainly about the growth of manufacturing industry? Perhaps, if we define the industrial revolution so narrowly that it has to refer to the growth of manufacturing industry. If we do that, however, we need another term to describe the processes leading to the advent of economic growth in Britain. Joel Mokyr’s term, the industrial enlightenment, aptly describes the broader processes through which a social climate favourable to innovation was made possible by growing recognition that material progress could be achieved through advances in science and technology.

Mokyr puts the various phases of the industrial revolution in context as follows:

‘The Industrial Revolution was above all a beginning. It cannot be judged on its own grounds without considering what it led to. What is truly significant is not the wave of great inventions made in the years between 1765 and 1800, but the fact that this process did not subsequently fizzle out. Some societies, in Europe and Asia, had witnessed previous clusters of macroinventions, leading to substantial economic changes. ... The “classical” Industrial Revolution in the eighteenth was not an altogether novel phenomenon. In contrast, the second and third waves in the nineteenth century, which made continuous technological progress the centrepiece of sustainable economic growth, were something never before witnessed and that constituted a sea change in economic history like few other phenomena ever had’ (p. 83-4).

Postsript:
I would like to draw attention to Deirdre McCloskey's comment below.

I would also like to draw attention to this video by Hans Rosling on You Tube.

Emancipation

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There is a list of my most popular posts below. I am pleased that a post about characteristics of a good society, that I wrote in 2009, is still one of the most popular. That post captures some of the ideas about freedom and individual human flourishing that I think are most important.